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Amazon’s paltry sales growth shows why it needs more stores

October 29, 2021, 5:17 PM UTC surprised the retail world on Thursday when it reported weak third-quarter e-commerce sales growth, suggesting that its brick-and-mortar rivals are better leveraging their built-in advantages ahead of the busy holiday season.

The Seattle-based tech giant reported that sales on its online stores rose 3% to $49.9 billion, a marked slowdown from the 37% clip a year earlier and below the 8% the overall market grew during that period. Yes, those numbers are compared with those during a pre-vaccine period in which consumers remained wary of going into stores. But the modest growth suggests Amazon—still by far the largest U.S. e-commerce player with a market share of about 40%—is hitting some walls.

The worries sent Amazon shares down 3% on Friday morning.

While Amazon has long been formidable with its pure e-commerce, it has had to build distribution centers that dot the U.S. along with fast delivery services to compete with the massive store networks of rivals like Walmart, Target, and Costco Wholesale.

It’s clear there’s still an advantage to physical retail, which Amazon itself saw with 12% sales growth at its physical locations. But for Amazon, physical retail is just one-twelfth that of its online business. (Amazon’s marketplace, which sells items for outside retailers, saw sales grow 18% to $24.2 billion.)

In the second quarter, the industry saw e-commerce growth numbers come back down to earth after astonishing growth at the height of the pandemic. At Target, for instance, digital sales rose 10% after nearly tripling in the year-earlier quarter. Walmart saw its digital sales rise 6% after doubling in the same period in 2021.

“[Amazon] will have to work increasingly hard to retain favor among customers. Especially so as more traditional retailers have made significant investments in their own online and multichannel propositions,” Neil Saunders, managing director of consulting firm GlobalData, wrote in a research note.

And Amazon being Amazon, it is doing just that. To cope with a strained supply chain and a hypercompetitive labor market that sometimes led to understaffing, the company spent $2 billion during the third quarter on extra pay and incentives. (Its average starting wage hit $18, it said in September.) On a conference call, Amazon finance chief Brian Olsavsky said labor shortages could be long-lasting. “Certainly for the foreseeable future, our capacity constraint is actually labor, which is new and not welcome,” he told analysts on a call.

It is also adding to its large infrastructure to speed up delivery, with CEO Andy Jassy noting that the company has nearly doubled the size of its fulfillment network since the start of the pandemic.

For now, investors jarred by Amazon’s so-so third quarter on the e-commerce front can expect more of the same. Adobe recently forecast holiday season online sales across the industry would grow 10%, well below last year’s rate and less than pre-pandemic levels. And it looks as if for the first time in a while, stores will be leading the charge this holiday season.

The National Retail Federation, a trade group, this week forecast holiday season sales in November and December could rise as much as 10.5%, lifted in large part by the return of shoppers to stores. “While e-commerce will remain important, households are also expected to shift back to in-store shopping and a more traditional holiday shopping experience,” the NRF wrote. But Amazon’s pinched profits last quarter show that it is planning for the longer term when e-commerce habits normalize.

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